There’s more to purchasing the ideal home than finding a listing you like and then waiting with bated breath to see if a seller accepts your offer. Extensive research and due diligence before even beginning a search can make for a positive buying experience that is seamless and straightforward. In addition, being knowledgeable about the process can put you in a position to act quickly if you come across a house you love.
Whether you’re a first-time home buyer or on your tenth purchase, it never hurts to get back to basics before diving into the market. In this post, we’ll talk about everything you’ve ever wanted to know about down payments and deposits.
Are you ready to start your house hunt in Peterborough or the Kawarthas? Our detailed buying checklist can help you stay on track. Download your copy right here.
Down Payments 101
A house is a massive financial commitment for most people, and very few have enough cash on hand to buy it outright. That’s why we turn to the banks to help finance the purchase. However, most lenders will not cover 100% of the price. You will need some money of your own to put toward your purchase.
The portion that you pay out of your own funds is what we call the down payment. The total amount required depends on the purchase price of the house. Fortunately, the guidelines have recently changed to make securing the right home more accessible, whether you’re upgrading or getting into the market for the first time.
- If the house or condo is priced at $500,000 or less, you need a 5% down payment, a total of $25,000. This hasn’t changed.
- Here is where the rules have relaxed somewhat. Under current guidelines, you now need 5% on the first $500,000, and then 10% on the amount from $500,000 to $1.5 million.
- If the home is more than $1.5 million, the breakdown is 5% on the first $500,000, 10% on the amount from $500,000 to $1.5 million, and 20% on anything exceeding $1.5 million.
Do you have your eye on a new home in Peterborough? The posts below can help you narrow down your choices:
- A Guide to the Current Peterborough Housing Market
- A Walk Through the Neighbourhoods of Peterborough
- Why Now Is the Time to Buy a Home in Peterborough
What About the Deposit?
You might think, “down payment, deposit, tomato, tahmahto,” but there is a difference. The down payment is the total amount you need out of your own pocket. The deposit is a part of that sum. The distinction is when each is paid.
The deposit is the amount you provide to the seller right away upon the acceptance of your offer. It’s essentially a show of good faith that you qualify for a purchase and will be able to close on the transaction as agreed. If you back out of the sale after this agreement goes through, you could forfeit the deposit unless you had conditions on your offer that allow you a legitimate out.
Unlike with the total down payment, there’s no hard and fast rule as to how much the deposit should be. That said, 3 to 5% of the purchase price is standard. If you’re buying a $500,000 condo, 5% works out to $25,000, the same as the down payment, which could explain where the confusion comes from. Some buyers will also agree to a higher deposit when in competition for a house, which can make their offer more appealing to a seller.
Deposits and Down Payments in Real Life
Let’s see how these numbers would look in a real-life scenario. Imagine you’re buying a home for $750,000 (which is a very real possibility in Peterborough). You need a $50,000 down payment in total. ($25,000 for the first $500,000 plus 10% on the remaining $250,000.)
Imagine you also agree to a 5% deposit. Now, this is where the calculations get a little trickier. Unlike with a down payment, the deposit is based on the entire purchase price, not the sliding scale. Assuming a 5% deposit on a $750,000 home, you would pay $37,500 within 24 hours of the seller accepting your offer. This amount is held in trust until your closing day, when you deliver the remaining $12,500, for a total down payment of $50,000.
What if you had something a little more luxurious in mind? Both your down payment and deposit would increase accordingly. A house worth $2 million requires a $225,000 down payment ($25,000 on the first $500,000 + $100,000 from $500,000 to $1.5 million + $100,000 on the amount above $1.5 million).
If we assume the deposit is based on the entire purchase price rather than the sliding scale, 5% works out to $100,000 that you pay within 24 hours. The remaining $125,000 is due upon your closing date. At this point, the remainder of your down payment combines with the deposit and your lender takes care of the rest.
Should you consider relocating to Peterborough? The posts below might inspire you to start packing:
- Why Peterborough is Perfect for Families
- Our Favourite Places to Skate in Peterborough and the Kawarthas
- All About Peterborough’s Stunning Green Spaces
Remember Your Closing Costs
Your down payment, including the deposit, is one of the many expenses of buying and owning a house. To ensure a comfortable and affordable experience, we also recommend setting aside at least 3 to 5% to cover any closing costs and other incidentals that may arise.
If your move goes well, you can always designate some of those funds toward that kitchen or bathroom remodel you’ve always dreamed about. Until then, it’s best to focus on the goal at hand: finding and securing that perfect new home of your own.
Do you have more questions about buying or selling a home in Peterborough or Kawartha Lakes? Our experienced Peterborough real estate agents are happy to help! Contact us at team@jeffandkatie.ca or call 705-243-9797 to begin exploring your options today.
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